Natural Gas Investment Theme

Background

In the coming years, the global demand for power will continue to grow, fueled by increased data center growth, new AI initiatives, and increased manufacturing usage as domestic manufacturing growth begins to accelerate. Data center energy consumption will likely drive most of the increased need for heightened energy production. Specifically, data center energy consumption in 2023 was 176 TWh in 2023 and expected to reach around 500 TWh by 2028 [1]. Correspondingly, the energy sector must continue to expand to meet the growing demand. The United States Energy Information Administration (EIA) publishes an annual energy outlook (AEO) report that details expected growth in energy production over the next few years. As shown in Figure 1, this year’s AEO expects to see a continued decline in coal production, and a dramatic increase in renewable energy production, eventually overtaking nuclear and natural gas production. Natural gas is expected to plateau over the next few years then decline, with nuclear maintaining relatively steady for the next few decades [2].

Figure 1: Energy Use from Electric Power [2]

However, most AEO projections since AEO2007 overestimated coal and hydroelectric generation figures and underestimated generation from natural gas, solar, and wind. As shown in Table 1, the EIA most severely underestimates future natural gas generation and overestimates future coal generation [3].

Table 1: Electricity Generation and Over-Estimation Likelihood [3]

Which Energy Sources Serve to Benefit?

Renewables

            With the tendency of the EIA to underestimate the renewable generation capability, while still predicting an increase in renewable electric capacity over the next few years, why are renewables not the play? With the current administration, there are major strides being made to eliminate clean energy tax incentives and cut subsidiaries that provide funding for renewable energy sources [4]. For many renewable power plants, these government subsidiaries are the only way their electric pricing can be competitive with cheaper energy alternatives. With government funding removed, many of these renewable energy sources may not be economically viable to build and supply the increased demand in energy. Currently, President Trump’s “Big, Beautiful Bill” has removed solar and wind tax credits while retaining nuclear tax credits. Additionally, wind and solar plants cannot compare to the capacity of natural gas, coal or nuclear power plants. Despite the increases in photovoltaic efficiency, solar energy is still quite far away from being as energy dense as the alternative energy sources.

Nuclear

            Currently, nuclear energy has several major obstacles preventing an increased deployment of nuclear power plants. First and foremost, the capital costs for these plants are massive. This type of capital can be hard to raise, especially if the projects tend to run over budget and past deadlines. Additionally, regulatory issues regarding plant deployment and waste disposal have plagued the nuclear industry and will continue to hamper the efficacy of nuclear energy as a rising energy provider. Instead, the most likely developments in the nuclear industry will likely be restarts of prematurely shut down reactor plants or the development of advanced reactors which should be more easily deployable. Consequently, this is not to say we are not currently exposed to nuclear, as this is an industry that should have steady growth over the next few decades.

Natural Gas

            Natural gas is one of my favorite themes for the next few years as it has continuously contributed a large portion to total U.S. energy production. In 2024, natural gas accounted for 38% of total energy production. Since surpassing coal in 2011, natural gas has consistently been the largest source of U.S. domestic energy production [5].

Figure 2: Most Electricity Capacity Retirements come from Coal [5]

Figure 2 shows most of the retired plants from this past year are from coal, which require another energy source to fill this gap. Undoubtedly, a portion of this energy capacity will come from solar and wind, however, natural gas will also have to expand to fill the gap. Additionally, as coal plants are retired, these plants are easily repurposed as natural gas plants. As natural gas prices begin to recover in 2025 and 2026, natural gas companies are set to benefit as they experience improvements in their net profit margins.

Which Natural Gas Companies are set to Benefit?

            For the natural gas sector, I am a fan of EQT’s story. EQT (NYSE: EQT) has been strategically acquiring assets that allow them to exploit the synergistic nature of the natural gas industry. Specifically, they have moved from solely benefiting from the drilling and exploration and now benefit from the gathering and transportation aspects of the business. As a result of these acquisitions, EQT can profit from natural gas prices as low as $2.45/MMBtu, helping to improve net profit margins [6]. My only qualm with EQT would be the large issuance of common stock to support their acquisitions over the past several years. However, the next few years should result in EQT generating large amounts of cash, at which point they can execute their more shareholder friendly policies, including expanding their dividend and executing the share repurchase program that is currently in place. In recent news, they signed a ten year deal with Duke Energy and Southern to supply the utilities with 1.2 Bcf/day of natural gas through their recently acquired Mountain Valley Pipeline [7]. Based on these developments and EQT being the second largest natural gas producer, they serve to benefit from increased energy demand as natural gas begins to take market share from coal and other renewables.

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References

[1] “DOE Releases New Report Evaluating Increase in Electricity Demand from Data Centers”, U.S. Department of Energy, 20 Dec. 2024, https://www.energy.gov/articles/doe-releases-new-report-evaluating-increase-electricity-demand-data-centers.

[2] “Annual Energy Outlook 2025”, U.S. Energy Information Administration, 15 Apr. 2025, https://www.eia.gov/outlooks/aeo/.

[3] “Annual Energy Outlook 2022 Retrospective: Evaluation of Previous Reference Case Projections”, U.S. Energy Information Administration, 14 Sept. 2022, https://www.eia.gov/outlooks/aeo/retrospective/.

[4] “US House Plans to Phase out Clean Energy Tax Credits”, Energy Monitor, 13 May 2025, https://www.energymonitor.ai/news/us-house-plans-to-phase/?cf-view.

[5] “Today in Energy”, U.S. Energy Information Administration, 9 Jun. 2025, https://www.eia.gov/todayinenergy/detail.php?id=65445.

[6] Surran, C., “EQT to ‘Limit’ Hedged Volumes to Half of its Gas, CEO Says”, Seeking Alpha, 26 Jun. 2025, https://seekingalpha.com/news/4462986-eqt-to-limit-hedged-volumes-to-half-of-its-gas-ceo-says---argus.

[7] “EQT Signs 10-Year Gas Deals with Duke, Southern”, Argus, 11 Jun. 2025, https://www.argusmedia.com/en/news-and-insights/latest-market-news/2697957-eqt-signs-10-year-gas-deals-with-duke-southern.